Make the most of your retirement. Retire with Friends. It s good to talk to Friends

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1 Make the most of your retirement Retire with Friends It s good to talk to Friends

2 You can count on Friends Retirement today looks a lot different than it did for previous generations. It s good news. There s more flexibility than ever before about how and when you use the money you ve saved into your pension pot. This brochure outlines your options and what you need to do if you re thinking of accessing your pension. It also explains how to get guidance and advice, so you can make the decisions that are right for you. Your pension may include defined benefits benefits which are based on a promised level, usually linked to your service and salary with an employer or other guarantees. If so, the options to take some or all of your pension pot as cash, or flexible access (drawing an income from your pot while the rest remains invested) may be restricted. You may also be required to take independent financial advice before making a decision. With plenty to think about, it s good to know that Friends are at your side. Contents The big picture 3 What are your options? 5 Option Postponing 7 Option Guaranteed income 9 Option Flexible access 13 Option Cash withdrawals 15 Option Combine your options 17 A useful summary 19 Pension terms explained 21 Where to get help 23 This brochure is based on Friends Life s understanding of current relevant legislation and should not be treated as financial advice. The tax treatment of pension benefits may vary in the future and is subject to your individual circumstances, you should consider seeking financial advice if you are unclear. 2

3 The big picture The big picture More freedom Changes introduced in April 2015 may give you more freedom when accessing the money in your pension pot. This affects you if you are 55 or over and have a defined contribution pension. This type of pension is based on how much has been contributed over the years and the value of your pension pot. Your options include taking an income from your pot, leaving your pot invested or taking a cash sum. Which option or options you choose may depend on a number of things such as: Whether you want to carry on working or not. Retirement isn t a fixed point and you don t have to retire to access your pension pot. You could keep working or take a part-time job, and still pay into some pensions and take money out of others. Whether you have other assets, savings or investments which are enough to fund your lifestyle. What your current State Pension entitlement is. Your tax position and any entitlement to state benefits you need to consider any changes that could come about if you take money from your pension. Whether you have any dependants or family to consider and making provision for them when you die. All of these points are part of the mix when it comes to deciding what options are right for you this brochure will help you weigh things up. Not every option may be available under your current pension plan so you may need to transfer your pension pot(s) to a different provider or plan first. In some circumstances you may be required by law to take independent financial advice before doing this. * Source: Institute and Faculty of Actuaries, Continuous Mortality Investigation (CMI), If you are a member of an occupational pension scheme sponsored by your employer, your pension plan will be subject to the rules of the scheme. In that case the trustee(s) of the scheme are responsible for deciding which options are available to members. In addition if you were a member of an occupational pension scheme prior to 6 April 2006, you may be entitled to additional options such as a higher tax-free cash sum. These additional options may be affected by how you access your pension and you should seek further information if you are unclear. With this type of scheme you should normally seek further information from the scheme trustee(s). Alternatively, you may have been previously advised to contact someone else such as the scheme provider (e.g. Friends Life) or an employee benefit consultancy. In that case, any references in this brochure to contacting the scheme trustee(s) should be read accordingly. For a definition of an occupational pension scheme please see page 22. If you are unsure if you are in an occupational scheme please use the contact details on the accompanying letter to find out. More responsibility The flipside of more freedom is more responsibility: making sure that you have enough money to last for your retirement. It s a fact that more of us are living longer. Men turning 65 are expected to reach their late 80s and women turning 65 their early 90s*. So retirement may last a good 20 years or more for many of us. And if you re thinking about taking some or all of your pension pot sooner than you d originally planned, you will have paid less in. To ensure you get the most from your pension pot it s important you shop around don t just settle for your own pension scheme or provider s products. We recommend you get guidance or advice to help you decide what to do. 3

4 What and when? We won t deny there s a lot to think about. So we urge you to use the guidance, information and advice that is available before deciding what to do with your pension pot. If you ve already decided to defer the date you take money from your pension pot, then please let us know. If not, here s an idea of what you should be considering and when. Four to six months before your retirement date: Check your chosen retirement date. You could change it, but check if there are any deadlines, whether charges will apply or if you may lose valuable guarantees. Check the value of all your pension pots, you ll find these on your statements. Check whether your pension plan(s) offer you a guaranteed annuity rate (called a GAR) or other guarantees because they may be worth keeping. You can find out more on page 10. Check the options available under your pension plan(s) and whether you will need to transfer your pension pot to another provider or plan to use certain options. You can ask your provider or scheme trustee(s) if you are unsure. Consider whether you want to make provision for your family or dependants following your death. Two to three months before your retirement date: About two to three months before your chosen retirement date, we will contact you with more details about the plan(s) that you hold with us. But if you ve a question now, talk to us our details are shown in the letter accompanying this booklet. If you are a member of an occupational pension scheme you can also speak to the scheme trustee(s). Guidance and advice It s important you shop around to find the best deal because you re making big decisions about your future. That may sound a little daunting, so it s good to know there s plenty of guidance and advice to help you. Seek guidance from Pension Wise Pension Wise is a government service offering free and impartial guidance to help you understand what you can do with your pension pot money. This tailored guidance is available online, over the phone or face to face. Go to or call No matter how small your pension pot we encourage you to take advantage of Pension Wise to help you understand your choices. Talk to a financial adviser They can make personal recommendations on the best options for you based on your own circumstances and financial objectives. To find an adviser near you see page 23. Talk to Friends We can talk you through your retirement plans and explain the options available to you. We can answer questions about Friends Life pension plans, State Pensions and retirement planning in general, but we cannot give advice on what is the best option for your personal circumstances. Our website provides a wealth of information too. Call us now on the number shown in the accompanying letter or visit Talk to your scheme trustee(s) If you are a member of an occupational scheme and require further information talk to your scheme trustee(s) direct.! Beware of scams! We need to make you aware of unregulated firms who are offering the chance to invest your cashed-in pension pot for you, promising excellent returns. They may also encourage you to transfer your pension pots to a scheme they control. Not only could you face high charges, you may lose all of your money and face a large tax bill. For more information on scams see page 18 or visit 4

5 What are your options? When can you take money from your pension pot? You can access your pension pot from your 55th birthday, even if you re still working. If you re in ill health, or entitled to a protected minimum pension age, you may be able to retire earlier than your 55th birthday. Talk to us or your pension provider for full details. If you are a member of an occupational pension scheme you should refer to the scheme trustee(s). Your options Here is an overview of the options you could choose. There is more detail about each one later in the brochure which you need to read to get the full picture. The Your big options picture Please note some pension plans or providers may not offer every option. So you may need to transfer your existing pension pot(s) to a different provider or plan to flexibly access your money. If your current pension plan(s) offers any guarantees you may be required to take independent financial advice before doing this. Your provider or scheme trustee(s) will tell you if that applies to you. Postponing You don t have to take the money from your pension pot at the age of 55 (or the date you selected when you started your pension). You could do it later. Maybe you want to keep working or perhaps you currently have enough money to live on from other investments and savings. For more on postponing see page 7. Guaranteed income You can use your pension pot to buy an annuity to secure a guaranteed income. There are many types of annuity to meet different needs. If you like, you can normally take up to 25% of your pot as a one-off tax-free cash sum before buying your annuity. You ll then pay tax on your annuity income. For more on guaranteed income see page 9. Flexible access You can choose to keep some or all of your pension pot invested and draw a flexible income from it this is called flexi-access drawdown or income drawdown. You can normally take up to 25% of your pension pot as a tax-free sum, but you ll pay income tax on any further withdrawals you take. For more on flexible access see page 13. Cash withdrawals You can take the whole of your pension pot as cash in one go, or take it in stages. You can take up to 25% of each withdrawal tax-free but the rest is taxed as income. For more on cash withdrawals see page 15. Combine your options You don t have to choose just one option and you don t have to decide everything at once. You may be able to mix and match all of the options above to find a solution that meets your own personal needs. For more on combining options see page 17. 5

6 Marion wants to leave her pension for now Marion is 65 and wants to stop working but doesn t want to touch her pension yet. Marion owns her home outright and plans to downsize. She will release a considerable amount of equity, which she plans to live on for the next few years. Marion s hoping that when she comes to retire fully, that her pension pot will be worth more. But she knows it could go down if the stock market falls. Marion has taken financial advice and knows the plus points and the pitfalls. This example is for illustrative purposes only and is not based on a real customer. It is to help you consider your own circumstances and must not be taken as giving financial advice. For advice based around your own circumstances, speak to a financial adviser. 6

7 Option Postponing What it means If you don t need to access your pension pot now, you could delay your retirement date. With a Friends Life pension you could postpone to any future birthday right up until your 75th. To carry on after this date, please get in touch as there may be limits on what is possible. Different pension plans have different rules. For example, some plans won t let you continue paying in after the retirement date you chose at the beginning of your plan. Please check with your pension provider or scheme trustee(s). Things to consider Your pension pot has more time to grow until you need it. But there s also a risk it could drop in value, it s not guaranteed and you could get back less than you invested. You can continue to pay into your pension. You ll get tax relief on your pension contributions until age 75 subject to limits see page 22 for more on tax relief. You ve more time to think about your options and what to do with your pension pot. Whether you continue paying contributions or not, charges will continue to be taken from your plan. Check which investment funds your pension pot is invested in. Are they still suitable for your financial objectives and the level of risk you are prepared to take? If you later decide you would like to use your pension pot to purchase a guaranteed income, the rates used to calculate this income may be different than they are now. Generally, the longer you leave it, the shorter period of time the income is expected to be paid for so the rates will be better. However, as the rates also depend on what investment returns the income provider expects to be able to earn, it s possible that the rates may be worse, so the income you receive may be less. This may be the case even if your pot has grown in value. In some circumstances You may have a guaranteed annuity rate (GAR) on your plan. This rate is often better than current rates you could receive. But if you postpone your retirement date you may lose this guaranteed rate. If a GAR applies to your Friends Life plan we have included more information in this pack. A market value reduction (MVR) may be applied to any with-profit investments you hold if you retire on any date other than the date you chose when you started your plan. An MVR would reduce the value of your plan. See more on page 22. What happens when you die If you die before age 75 your untouched pot could be used to provide an inheritance, passing on a tax-free cash sum or tax-free income to your beneficiaries. If you die after the age of 75, any untouched pension pot can be passed on to beneficiaries. They will pay 45% tax on any cash sum payment made to them between 6 April 2015 and 5 April Any income they draw from 6 April 2015, or any cash sums paid after 5 April 2016 will be taxed as their income. Here to help Any questions about your plan with us? Talk to Friends call us on the number shown in the accompanying letter. Visit Talk to your scheme trustee(s) if you are a member of an occupational pension scheme. Pension Wise offers free and impartial guidance to help you consider your options go to or call

8 Pic here John wants a steady income John would like to receive a steady income for life, so intends to purchase a lifetime annuity when he retires. This will pay a fixed income and there s no worry that his pension pot will run out. John knows it makes sense to shop around to find the best rate and the features he s looking for, such as paying his wife an income when he dies. This example is for illustrative purposes only and is not based on a real customer. It is to help you consider your own circumstances and must not be taken as giving financial advice. For advice based around your own circumstances, speak to a financial adviser. 8

9 Option Guaranteed income What it means You can use your pension pot to buy a policy that gives you a guaranteed income for life (known as a lifetime annuity) so you don t need to worry about your pension pot running out. An annuity can provide an income, not only for you when you re alive, but you can also choose to provide an income for your beneficiaries after you have died. Before you buy an annuity, you can normally choose to take up to 25% of your pension pot as a tax-free cash sum. The more tax-free cash you take, the less money you ll have in your pot to purchase an annuity with. You then pay tax on the annuity income just as you would with any other income you receive. The amount of annuity you get depends on many factors such as: the type of annuity you decide to buy the amount of money you use to buy your annuity which provider you buy your annuity from the annuity rates available at the time your age your health or lifestyle. Things to consider You could ask for your payments to stay the same each time or increase (either by a fixed amount, or to rise in line with inflation). See level or escalating annuities opposite. You choose how regularly you d like to receive the income payments. This could be monthly, quarterly, half-yearly or yearly. Charges will be taken for the cost of setting up the annuity and for ongoing administration. With a lifetime annuity you can choose a guaranteed period, for example 10 years. This means the annuity continues paying to a beneficiary for that period even if you die before then. If you choose a guaranteed period your annuity income will be lower. You can choose to have a cash sum paid to your beneficiaries on your death called annuity protection lump sum death benefit. See page 21. It s important to shop around because providers offer different annuity types and options, along with different rates to calculate the income they could pay you, (especially if you are in poor health) and you need to ensure you are getting the highest income you can. You have 30 days to change your mind after your annuity has been set up. So you need to think carefully before you commit, as your annuity can t be changed after that time. Lifetime annuities options to consider Single or joint annuities A single life annuity gives you an income for life so when you die, the income will stop unless you ve chosen a guaranteed period when you bought the annuity. A joint life annuity gives you an income for life. Then, after you die, it provides an income for a beneficiary. You can choose whether the income stays the same as the level you had, or reduces to say 50% of the amount. A joint life annuity provides you with a lower income than a single life annuity. Level or escalating annuities A level annuity pays you the same amount of income for the rest of your life. An escalating annuity increases each year by the percentage you choose when you set it up. This could be a fixed rate, for example 3% or 5% a year. Or you could link it to the cost of living, so it reflects changes in the Retail Prices Index. An escalating annuity starts lower than a level annuity and it could take a number of years until the income reaches the same as a level annuity. Without an increasing retirement income, even low levels of inflation can erode the value of your income over time. Enhanced annuities Enhanced annuities (also known as impaired life annuities) can pay a higher income than normal annuities by taking into account your medical history and lifestyle. Your annuity provider could increase your income if you have a health issue that threatens to reduce your life span, such as cancer, chronic asthma, diabetes, high blood pressure, kidney failure, multiple sclerosis or if you ve had a stroke or heart attack. They can also take into account other medical issues and your lifestyle, for example if you are overweight, smoke or drink regularly. They may also take into consideration your occupation and where you live. Other providers may offer enhanced annuities for medical conditions or lifestyle factors not covered by your existing provider, so shopping around for the highest income is important. 9

10 Guaranteed annuity rates (GARs) Some pension plans guarantee the annuity rates that are available to you at your retirement date. At the moment they are usually better than the annuity rates normally used to work out your retirement income. We d like to make you aware that with your Friends Life plan, you will lose any GAR if you move your plan to another provider. Also, you may lose any GAR if you buy any product other than an annuity with us, postpone your retirement or retire early. In some cases the law requires you to take independent financial advice before you give up a GAR. Your provider will tell you if this applies to you. If a GAR applies to your plan with us we have included more information in this pack. What happens when you die If you have a single life annuity, and no other features, such as a guaranteed period, the income payments will stop when you die and your plan will end. If you die before 75 Income from a joint life annuity is paid to your beneficiary tax-free for the rest of their life. Income from any remaining guaranteed period continues to be paid tax-free to your beneficiary until the end of the period. If an annuity protection lump sum death benefit is due, it is paid tax-free to your beneficiary. If you die age 75 or over Income from a joint life annuity is paid to your beneficiary for the rest of their life. They have to pay income tax on this income. Income from any remaining guaranteed period continues to be paid to your beneficiary until the end of the period. They have to pay income tax on this income. Any annuity protection lump sum death benefit due is taxed at 45% if paid before 6 April After that date your beneficiary has to pay income tax on it. Here to help Any questions about your plan with us? Talk to Friends call us on the number shown in the accompanying letter. Visit Talk to your scheme trustee(s) if you are a member of an occupational pension scheme. Pension Wise offers free and impartial guidance to help you consider your options go to or call

11 Investment-linked annuities If you are willing to take more risk in return for a potentially higher income, you could opt for an investment-linked annuity. This also guarantees to pay out for life but your income rises and falls in line with the value of investments such as stocks and shares. So while it could pay more over the longer term than a standard annuity, your income could also fall. Although they offer a minimum income if investment performance is weak. Short or fixed term annuities As an alternative to a lifetime annuity you could take out a short-term or fixed-term annuity. These pay out an income for a set period of time instead of for life. At the end of the term you can then review your options. Various features and options are available with either investment-linked or short/fixed term annuities please speak to a financial adviser for more information. Not all providers offer all annuity options so it is important to shop around and request quotes to compare as well as obtain guidance and advice to find the best annuity for you. A useful free tool to help you compare annuity options is available from the Money Advice Service. They can supply information but can t provide advice. 11

12 Brian wants a flexible income Brian is 62 and wants to work part-time until he decides to retire fully. So he s using flexi-access drawdown to keep his pension pot invested and will keep paying money in, so it has potential to grow. With this option, Brian has the freedom to take up to 25% of his pension pot as a tax-free cash sum. He can use the rest to provide a regular taxed income to top up his part-time salary. He can also take taxed cash sums, to help pay for a holiday and home improvements he wants to carry out. He knows he needs to manage his investments carefully and review them regularly, to make sure he doesn t take too much out leaving enough invested to cover the whole of his retirement. This example is for illustrative purposes only and is not based on a real customer. It is to help you consider your own circumstances and must not be taken as giving financial advice. For advice based around your own circumstances, speak to a financial adviser. 12

13 Option Flexible access What it means This option allows you to keep your pension pot invested and take a flexible income from it when it suits you. It is known as flexi-access drawdown or income drawdown. You can take as much or as little income (including taking no income) as you need. Before starting flexible access with all or part of your pension funds, you can usually take the first 25% of that amount as a tax-free cash sum. You will pay tax on any further income you withdraw just as you would with any other income you receive. Not all pension plans or providers offer flexi-access drawdown. If it is not available on your plan it should be possible to transfer to a product or provider that does offer it. Make sure you shop around for the best deal. Flexible access doesn t need to be a lifelong commitment. For example, at any point you could use your remaining fund to buy a different product such as guaranteed regular income through an annuity. Things to consider You can change the income you receive, set it at a certain level and change it at any time you like. It is flexible and you are in control. It s important to shop around because providers offer drawdown products with different features and benefits. There may also be limits on the regular or one-off withdrawals you make you need to find the product that is right for you. The number of drawdown products is likely to increase further in the future including combining elements of a guaranteed income with flexible access. So it s worth keeping an eye on what providers are offering even after you have commenced drawdown. Because your pension pot stays invested, the value of the pot remaining after income is withdrawn can fall as well as rise and is not guaranteed. You should check the funds it is invested in to ensure they are still suitable for your financial objectives and level of risk you are prepared to take. Charges are taken for the fund management and for ongoing administration. If you transfer to a new product to set up drawdown there will probably be a charge for setting up the product. Once you ve started to draw an income, you can continue investing into your pension pot, but contributions will be subject to a reduced annual allowance of 10,000 a year see page 21. Tax relief will stop at age 75. What happens when you die If you die before the age of 75, any remaining pension pot could be used to provide an inheritance, passing on as a tax-free cash sum or tax-free income. If you die after the age of 75, any remaining pension pot can be passed on to beneficiaries. They will pay 45% tax on any cash sum payment made to them between 6 April 2015 and 5 April Any income they draw from 6 April 2015, or any cash sums paid after 5 April 2016 will be taxed as their income. You may need to seek independent financial advice if you re considering flexi-access drawdown. Whether it s suitable for you depends on your personal circumstances. You may also lose certain guarantees or protected features that could apply to your pension pot. In some cases you may be required to take independent financial advice before you give up certain guarantees. Your provider or scheme trustee(s) will tell you if this applies to you. Here to help Any questions about your plan with us? Talk to Friends call us on the number shown in the accompanying letter. Visit Talk to your scheme trustee(s) if you are a member of an occupational pension scheme. Pension Wise offers free and impartial guidance to help you consider your options go to or call You need to manage your remaining pot carefully, as how long the pot lasts is dependent on the value of your pension pot, how your investments perform and how much you withdraw. If the value of your income withdrawals exceed the growth of your investments, your pension pot may run out. 13

14 Lillian wants to cash in her pension Lillian has read that she can take some or all of her pension pot as cash with the first 25% tax-free! It sounds good, but she s getting cold feet. Her pension pot is 60,000, so she d take 15,000 tax-free. But as Lillian s wages will be 44,000 in the tax year she wants to cash in she would pay 18,000 in tax (40%) on the remaining 45,000 leaving only 27,000 for herself. Also with the money sitting in her savings account, it would be included in any assessment for state benefits too. And it doesn t leave her much for the rest of her retirement. Lillian is only 60 and in good health so her money may have to last her another 20 years or more. So it s not as simple as she thought and she is taking advice. This example is for illustrative purposes only and is not based on a real customer. It is to help you consider your own circumstances and must not be taken as giving financial advice. For advice based around your own circumstances, speak to a financial adviser. 14

15 Option Cash withdrawals What it means You can cash in all of your pension pot as a cash lump sum in one go or take it in stages this is known as an uncrystallised funds pension lump sum (see page 22). When you take cash (either in one go or in stages) 25% of each cash sum is tax-free, but you ll pay income tax on the remaining 75%. If you are over 75, or the total of your pension pot is near or over the standard lifetime allowance (see page 22), or you are eligible for protection from it, please talk to us as the rules may be different. If you are a member of an occupational pension scheme please speak to your scheme trustee(s). Things to consider You stay in control of your money. You have freedom and flexibility over what you do with the cash. You can keep paying into your pension but contributions will be subject to a reduced annual allowance of 10,000 a year see page 21 unless you are able to take your cash under small lump sum rules, see the bottom of this page. 75% of the cash you withdraw is taxed as income. Cashing in your pension may take you into a higher tax bracket, especially if you are working as well. If you require tax advice on your own personal circumstances then please seek professional tax advice. The cash is added to your other income, so as well as affecting your tax bill, it may reduce your entitlement to any state benefits. You ve built this money up over your working life to provide for you in retirement, so you ll need to plan carefully to make the money last. If you cash in some or all of your pension, there may be less to pass on to your beneficiaries when you die. Any money remaining in your pension pot is still invested, so the value could go up and down and is not guaranteed. You should check the funds it is invested in to ensure they are still suitable for your financial objectives and level of risk you are prepared to take. Also bear in mind that charges will continue to be taken for ongoing fund management and administration, so you ll need to keep a close eye on your remaining pot and review it regularly. You may also lose certain guarantees or protected features that could apply to your pension plan. In some cases the law requires you to take independent financial advice before you give up certain guarantees. We will tell you if this applies to your pension plan with us. If you have received a pension credit (a share of an ex-spouse or ex-civil partner s pension) as a result of a divorce, you may not be able to take this option check with your pension provider or scheme trustee(s). What happens when you die If you die before the age of 75, any remaining pension pot could be used to provide an inheritance, passing on as a tax-free cash sum or tax-free income. If you die after the age of 75, any remaining pension pot can be passed on to beneficiaries. They will pay 45% tax on any cash sum payment made to them between 6 April 2015 and 5 April Any income they draw from 6 April 2015, or any cash sums paid after 5 April 2016 will be taxed as their income. Here to help Any questions about your plan with us? Talk to Friends call us on the number shown in the accompanying letter. Visit Talk to your scheme trustee(s) if you are a member of an occupational pension scheme. Pension Wise offers free and impartial guidance to help you consider your options go to or call Is the value of your pot 10,000 or less? If the value of your pot is no more than 10,000 you may be able to take this money using the small lump sum rules instead. You can still only take out 25% tax free and you may have to pay tax on the remaining 75% depending on your individual circumstances. But using these rules means you can retain the standard annual allowance in respect of any further pension contributions you choose to make. Please speak to your pension provider for more information. 15

16 How much tax could you pay on cash withdrawals? Here is an example You ve decided to take your whole pot of 60,000 as cash. You also work part-time and earn 7,000 a year. 1 Take 25% away from your pension pot as tax-free cash 2 Add your other taxable income 3 Take away your tax-free allowance You were born after 5 April Your Personal Allowance is 10,600 (2015/16). 4 Check your tax rate 60,000 45,000 52,000 You pay 20% on income up to 31,785 = 6,357 25% (= 15,000) 7,000 10,600 You pay 40% on the remaining 9,615 = 3,846 Total tax you pay for the year 45,000 52,000 41,400 10,203 This is an example only. Tax details are based on our interpretation of current tax legislation and may change. The calculation above shows an example tax liability over the whole tax year for someone who has full entitlement to a basic personal allowance. Tax will be deducted on the taxable element of the first cash withdrawal under PAYE using emergency code on a month one basis unless you provide an in-date Form P45. This may mean the tax deducted being too low or too high but it will not take into account your own personal circumstances and may be different from what is shown above. HM Revenue & Customs (HMRC) will review your tax position after the end of the tax year and will detail to you any over or underpayment of tax. You may be able to reclaim any overpaid tax before the end of the tax year. Please note, if you are a member of an occupational pension scheme the scheme trustee(s) is responsible for paying and accounting for tax. 16

17 Option Combine your options What it means You don t have to choose one option, you may be able to mix and match all of the options available to suit you. And you can keep saving into a pension if you like, subject to HMRC limits on tax relief and the annual allowance. Things to consider What you decide may depend on: when you stop working or cut down your working hours your income objectives and attitude to risk the size of any other pension pots, savings, investments or property you have what your pension provider (or other providers) allow and if you are a member of an occupational pension scheme, what options the scheme trustee(s) allow whether you have financial dependants, such as children at university or elderly parents to care for your age and health including meeting unexpected costs as you grow older such as long-term care costs whether your circumstances are likely to change in the future. Mark wants to mix it up Mark has several pension pots with different providers. So he s thinking of securing a guaranteed income with his biggest pot and consolidating (see page 21) two smaller pots to take cash sums when he needs them. From his biggest pot, he s decided to take the first 25% tax-free, so he can go on a month-long holiday at retirement. His children have left home and so Mark only has himself and his wife to think about. So he s happy with this plan. This example is for illustrative purposes only and is not based on a real customer. It is to help you consider your own circumstances and must not be taken as giving financial advice. For advice based around your own circumstances, speak to a financial adviser. 17

18 ! Scams spotting the warning signs It s a sad fact that pension scams are on the increase. So we re right behind the crossgovernment initiative to help people spot the warning signs: The offer of a free pension review, one-off investment opportunity or legal loopholes by a cold call, text message, website pop-up or someone knocking on your door. A promise to access your pension before the age of 55 and/or to get more than a 25% tax-free sum through a loophole. Offers of guaranteed returns or rates that seem too good to be true or to transfer your funds overseas. A strong proposal to put all your money into a single investment. Delivery of paperwork to your door by courier who asks you to sign for it on the spot. Websites that claim to be, or look like official government sites you ll find official sites at only. The golden rule is not to rush into anything or feel pressured to make a decision. Visit to find out more. What you can do Regulated advisers are on the Financial Conduct Authority (FCA) Register, so you could call the FCA on or visit to check. Call The Pensions Advisory Service on or visit If you ve already accepted an offer and you think it might be fraudulent, report it to Action Fraud at or call

19 A useful summary Here s a useful summary to help you compare your options. Of course, on top of these you could postpone taking your benefits or take a combination of options. Guaranteed income (lifetime annuity) Flexible access (flexiaccess drawdown) Cash all in one go Cash withdrawals Taken in stages How much tax-free cash can I get? Normally up to 25% Normally up to 25% 25% of pot 25% of each of pot 1 of pot 1 withdrawal Regular income? Yes Yes (if required) No No Guaranteed income for life? Yes No 2 No No Do I need to review my pension pot regularly? Could my pension pot run out later in retirement? Pays higher income for medical conditions or poor lifestyle? No Yes N/A Yes No Yes Yes Yes Yes (subject to provider) No No No A useful summary How much tax will I pay? After any tax-free cash the rest will be subject to income tax After any tax-free cash the rest will be subject to income tax After any tax-free cash the rest will be subject to income tax After any tax-free cash the rest will be subject to income tax Is tax relief on any further pension contributions affected? No Yes Yes 3 Yes Flexibility to change options later? No, unless short/ fixed term annuity taken Yes N/A Yes What happens when I die? Depends if you have selected a joint life annuity, any guaranteed period, or protection. If not, the guaranteed income will end Remaining pot will be payable to your beneficiaries N/A Remaining pot will be payable to your beneficiaries 1 Applies to the amount allocated for this product, for example if you use all or part of your pension pot. Once you ve allocated money to either flexible access or guaranteed income you can t take further tax-free cash from it later. 2 But some providers may offer some form of guaranteed income with their flexible access products. 3 Unless your pot is 10,000 or under and taken under small lump sum rules - see page

20 What now? Your checklist Track down all your pension pots and check their value You can see the most recent values on your latest statement. Or you can call your pension provider or scheme trustee(s) and ask for the current value. The Pension Tracing Service can help you trace any pension pots that you may have lost track of Consider other income sources Visit or call the Future Pension Centre on to find out what income you could expect from the State Pension. Look at investments, property and other savings which you could call on in retirement to help provide an income. Work out how long you may need the money for People turning 65 now are expected to live into their early 90s for women and late 80s for men*. So retirement may last a good 20 years or more for many of us. Don t underestimate how long you may need an income for. Understand all the options available There are more options at retirement than ever before. So consider all the options discussed in this brochure, as well as whether you need to provide for any beneficiaries, and also the tax implications of your choice. Seek guidance and advice We urge you to make the most of all the free and impartial guidance available from Pension Wise. You can also get tailored advice for your own personal circumstances by talking to a financial adviser. * Source: Institute and Faculty of Actuaries, Continuous Mortality Investigation (CMI), 2013 Here * Source: to helpinstitute and Faculty of Actuaries, Continuous Mortality Investigation (CMI), 2013 Any questions about your plan with us? Talk to Friends call us on the number shown in the accompanying letter. Visit Talk to your scheme trustee(s) if you are a member of an occupational pension scheme. Pension Wise offers free and impartial guidance to help you consider your options go to or call

21 Pension terms explained Here are many of the terms you often hear when people talk about pensions. Though you may not find all of them in this brochure, you may see them when you re reading up about your options elsewhere so we hope you may find this section useful. Additional State Pension (Second State Pension, SERPS) As well as the basic State Pension, you may qualify for an additional pension from the State. From 2002, this has been known as the State Second Pension. Before that it was called the State Earnings Related Pension Scheme (SERPS) and Graduated Retirement Benefit Scheme before that. The current two tier State Pension Scheme will be replaced by a single tier for people who reach State Pension age on or after 6 April Annual allowance This is the maximum amount of pension contributions you (and your employer if they contribute to your pension) can make each year before a tax charge (the annual allowance charge) applies. In the tax year 2015/16 it is 40,000. If your pension contributions in a tax year exceed the annual allowance you may be taxed on the excess. If you access your pot using flexi-access drawdown or withdraw a cash sum (except under the small lump sum rules see page 15), you will be subject to a lower annual allowance of 10,000. This applies in respect of all your Defined Contribution Schemes. Your pension provider or scheme trustee(s) will tell you when this applies to you. This is a complex topic and you should refer to a financial adviser if you are unsure. Annuity A policy issued by an insurance company that can provide a guaranteed income in exchange for a cash sum (which could be all or part of your pension pot). An annuity can provide an income for the rest of your life (a lifetime annuity) or for a set period of time. It is important you shop around with other companies to get the best deal. There are different types of annuities and these are explained on pages 9 to 11. Annuity protection lump sum death benefit A lump sum payable to your nominated beneficiary when you die. The amount is up to the value of your pension pot used to buy the annuity, less the income already paid. No tax is payable if you die under the age of 75. If you die age 75 or over a 45% tax applies for the tax year 2015/16, changing to the beneficiaries normal income tax rate from tax year 2016/17. Basic State Pension The Basic State Pension is a regular income most people can receive when they reach the State Pension age. The amount payable is based on the number of years you ve been paying National Insurance contributions over your working life. For people reaching State Pension age on or after 6 April 2016, the rules are changing. To find out the current and new rules and what income you could expect, visit or call the Future Pension Centre on Beneficiary, beneficiaries A dependant or nominee (such as a friend or other beneficiary) who may be eligible to receive benefits after you die. This can include bodies such as charities. Consolidation If you have two or more pension pots you may have the option to bring them together into one pension pot. This process is called consolidation. Defined Benefit Schemes Often called final salary schemes. These pensions are set up by employers. They include a guarantee or promise and usually pay you a retirement income that s calculated as a proportion of your salary. The amount of pension cash sum you can take will be determined by the rules of your scheme. As such schemes are often subject to additional rules, we recommend you speak with your scheme provider before making any decisions about what to do with a Defined Benefit pension. Defined Contribution Schemes These schemes are often called money purchase schemes and may be a personal pension scheme or an occupational pension scheme. Usually you and/or your employer pay into the plan. At the point of retirement, you will have a pension pot based on how much has been paid in and how the investments have performed, less the costs of running the scheme. Guaranteed annuity rate (GAR) A rate your pension plan provider promises you, if you take out a lifetime annuity with them. This rate is often better than current rates you could receive on the open market. You can check by shopping around. See page 10 for more information on GARs. You may have to take independent financial advice before you give up a GAR. Guaranteed period (for lifetime annuities) You can choose to have a guaranteed period built in, usually five or ten years. If you die in this time, your annuity payments will continue to a beneficiary for the rest of that period. If you die under age 75, it is tax-free. If you die after 75, your beneficiary pays income tax on the payments. Income drawdown See flexible access page 13. Allows you to draw an income from your pension scheme while leaving the rest of the pot invested. Lifetime allowance See standard lifetime allowance on the next page. (continued on next page) Pension terms explained 21

22 Market Value Reduction (MVR) If your pension pot is invested in a with-profits policy and you take money out, switch out of the with-profits fund, or transfer to another product, on any date other than the retirement date you selected when you originally started your policy a Market Value Reduction (MVR) may apply. An MVR reduces the value of your pension pot so it more closely reflects the return earned by the with-profits fund while your plan has been invested. Providers are most likely to apply an MVR after there has been a significant fall in the stock market. Providers will tell you if they are applying an MVR. Notice period There may be occasions when a notice period might be applied before you can access your pension pot, particularly if you are invested either directly or indirectly in property. This notice period could be up to six months, or longer in exceptional circumstances. Your provider will tell you if a notice period is applied. Occupational Pension Schemes These are established by an employer and managed by a board of trustees who will normally take out a pension plan with an insurance company on your behalf. Open market option Open market option (OMO) is a term often used to describe shopping around to find the best annuity from other providers. PAYE Pay As You Earn is the system by which the government takes tax directly from income such as wages and salaries. Personal Allowance This is the income you can earn before you pay any tax. Most people s Personal Allowance is 10,600 (tax year 2015/16), unless you were born before 6 April 1938 or your income s over 100,000. Personal Pension Schemes If you join a Personal Pension Scheme you will take out a pension plan directly with an insurance company. Your employer may also contribute to your plan which may form part of a Group Personal Pension Scheme available to other employees. Standard lifetime allowance There is a limit on the value of benefits you can build up in all your pension pots before a tax charge applies (the lifetime allowance charge). The limit is called the standard lifetime allowance and is currently 1.25 million (tax year 2015/16) reducing to 1 million for tax year 2016/17. You may have a higher personal lifetime allowance if you have applied to HMRC for protection. When you access your pension, or when you reach age 75 without using all of your pension funds, the value of all your pension benefits (including any already in payment) must be tested against the lifetime allowance. When you die any remaining unused pension pots paid to your beneficiaries must also be tested against the lifetime allowance. Any excess will be subject to a 55% tax charge if paid as a cash sum or a 25% tax charge, applied in addition to income tax, if paid as income. This is a complex topic and you should refer to a financial adviser if you are unsure. State Pension age This is the age when you can start to receive the basic State Pension. Tax-free cash sum You have the right to take a proportion of the pension pots you ve built up as a tax-free cash sum after age 55. This is normally limited to 25% of the total pot (though it may be less if the total value of your pension pots exceed the standard lifetime allowance). If you re in a Defined Benefit Scheme the formula may be different. You may be entitled to a higher tax-free cash sum if you were a member of an occupational pension scheme prior to 6 April Please refer to a financial adviser if you are unsure. Tax relief To encourage you to save for retirement, the government gives you tax relief on the money you pay in. This increases your pension pot and reduces your tax bill. For basic rate taxpayers, if you have a Personal Pension plan, your plan provider claims tax back from the government at the basic rate of 20%. So for every 80 you pay into your pension, you end up with 100 in your pension pot. Tax relief will stop at age 75. Higher rate taxpayers can claim more. Find out more from your provider or HMRC. If you are a member of an Occupational Pension Scheme set up by your employer, you automatically receive tax relief at the highest rate you pay. Please note that tax relief on your personal contributions to all your pension plans each tax year is limited to 100% of your taxable income or 3,600 if higher. Uncrystallised Funds Pension Lump Sum A cash sum taken from unused funds in a pension pot. 25% of each cash sum is tax-free and the rest is taxed as income. With-profits investment/plan With-profits policies are medium to long-term investment funds offered by insurance companies. Your money is pooled with other people s money and invested in the company s with-profit fund. You get a share of the profits and may also get a final bonus. There may be penalties if you take out the money early see MVR. 22

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